Legislature(2017 - 2018)HOUSE FINANCE 519
03/27/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 111 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
March 27, 2017
1:36 p.m.
1:36:01 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:36 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Taneeka Hansen, Staff, Representative Paul Seaton; Brandon
S. Spanos, Deputy Director, Tax Division, Department of
Revenue; David Teal, Director, Legislative Finance
Division.
PRESENT VIA TELECONFERENCE
Carl Davis, Research Director, Institute on Taxation and
Economic Policy (ITEP), Anchorage.
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 111 was HEARD and HELD in committee for
further consideration.
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the agenda for the day.
HOUSE BILL NO. 111
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
and providing for an effective date."
1:36:36 PM
Co-Chair Foster CLOSED Public Testimony.
HB 111 was HEARD and HELD in committee for further
consideration.
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
1:36:56 PM
TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, reviewed
the PowerPoint Presentation: "State Revenue Restructuring
Act." She relayed that the slide presentation had been
presented earlier in the session but was updated to reflect
the changes in the Committee Substitute (CS). She began
with slide 2: "HB 115: Permanent Fund Earnings":
5.25% Permanent Fund POMV, 5% after FY19.
• 1/3 of POMV to pay dividends. $1250 and growing over
years, with payouts more stable than current
calculation.
• 2/3 of POMV directed to the General Fund. $1.69
billion in
FY18 growing to $2 billion in FY25.
• Residents may choose to apply their PFD to their
upcoming state income tax due as a Refundable Tax
Payment. Any amount left over after paying taxes will
be refunded by the Tax Division.
1:39:12 PM
Ms. Hansen moved to slide 3: "Income Tax":
Adjusted Gross Income
$4000 personal exemption
PFD exemption
Total estimated revenue
FY19 -half year $330 million
FY20- First full year $663 million*
Non-residents pay between 7-14% of total tax revenue:
$44-93 million in a full year
Ms. Hansen explained that a $4000 personal exemption would
be allowed rather than itemized deductions similar to
federal income taxes.
1:40:18 PM
Representative Wilson asked what data was used for the
percentage of non-residents. Ms. Hansen responded that the
percentage came from an ISER report and in combination with
information from the Department of Labor and Workforce
Development (DOL) and based on non-resident information
cited from a Department of Revenue (DOR) previous fiscal
note from HB 182 (Individual Income Tax and Tax Credits)
[Withdrawn - 04/20/2016]. Representative Wilson asked how
current the data was and where it ultimately was derived
from. Ms. Hansen offered to verify the data she employed in
her calculation of non-residents. Representative Wilson
wondered about the personal exemption for non-residents and
why it was offered to them. Ms. Hansen responded that the
U.S. Constitution prohibited offering the exemption
exclusively to residents. She noted that the way non-
resident income was calculated based on world-wide income,
the Alaskan exemption would only account for a smaller
portion of the exemption relative to the amount of their
income connected to the state. Representative Wilson
inquired whether the U.S. or state constitution prohibited
the non-resident exemption. Ms. Hansen believed that the
provision was contained in both constitutions.
Representative Kawasaki asked whether the half year
calculation was based on the first year of implementation
that began mid-way through the year. Ms. Hansen answered in
the affirmative.
1:44:07 PM
Representative Kawasaki commented that Alaska had a winter
season and a construction season. The construction season
lagged a bit because of the weather. He wondered when the
half year began. Ms. Hansen responded the current year
would capture January 1, 2017 through June 30, 2017.
Representative Pruitt asked whether the information
factored in the data for job losses in the state. He noted
that "dramatic shifts had taken place in the last year and
a half." Ms. Hansen responded that Mr. Davis' [Carl Davis,
Research Director, Institute on Taxation and Economic
Policy (ITEP)] numbers were reflected the 2016 tax year,
which were the most recent. She relayed that his report
noted unemployment as a possible change in revenue, but did
not have enough definitive information to adjust the model.
Representative Pruitt thought Ms. Hansen was referencing
calendar year 2015 with the information filed through 2016.
He opined that due to the loss of many high paying jobs in
the oil sector and other job losses the figures were not
dependable two years later.
1:47:14 PM
Ms. Hansen continued to the flow chart on slide 4: AK
Permanent Fund." The new committee substitute (CS) numbers
were reflected on the chart. She noted the slight decrease
in the Permanent Fund and that the income tax was based on
adjusted gross income instead of federal tax liability. The
intention of the chart was to show where state revenue
funds currently flowed and where they would flow under HB
115. The green boxes reflected new information. The
Permanent Fund Dividend (PFD) calculation was not altered.
The only difference was that the distribution was based on
the structured draw from a Percent of Market Value (POMV)
rather than distributable income. In addition, a resident
can opt to apply the PFD to income tax liability. She
continued to slide 5: "HB Proposal: Total Estimated Revenue
to General Fund":
FY20 - First Full Year of Tax Implemented
Income Tax Revenue* $663,000,000
2/3 of the 5% POMV Draw ** $1,780,000,000
Total Revenue to General Fund $2,443,000,000
Separate 1/3 of POMV Draw to dividend $879,000,000
*Dept. of Revenue initial estimate updated fiscal note
forthcoming
** 5.25% draw for previous two years, 5% POMV Draw
starting FY20 amount based Legislative Finance
calculations. 33% to the dividend and 67% to the
general fund.
1:50:04 PM
Ms. Hansen advanced to slide 6: "Potential future impact
based on projected status quo & HB 115 dividends in FY25."
She reported that the chart portrayed the long-term
distributional impact of HB 115 and the reduced PFD across
income groups. She noted that the information was contained
in the ITEP report that would be addressed later in the
meeting. She relayed that the change in the dividend was
not as great in the out years. She cautioned that the
numbers were predictions, but the PFD draw was more stable
under HB 115 because of the POMV draw. In the out years,
the chart showed an even income impact between the lowest
20 percent and the top 1 percent.
1:52:31 PM
Representative Wilson asked how many actual individuals
were included in each income group. Ms. Hansen deferred to
Mr. Davis to answer Representative Wilson's question.
Representative Wilson requested further clarification
regarding the composition of the income groups.
Co-Chair Foster reported that Mr. Davis would be presenting
after Ms. Hansen's testimony.
1:53:40 PM
Ms. Hansen turned to slide 7: "Why Adjusted Gross Income?":
Volatility of federal tax liability - If federal tax
rates change this automatically impacts state revenue
levels, with no state input. Issue is addressed by
using adjusted gross instead of tax liability.
Exemptions & credits - Using adjusted gross gives a
clean slate instead of automatically adopting federal
credits and deductions.
Equity between capital gains & other income types -
All income is taxed at the same rate under adjusted
gross income, avoiding the federal tax reduction for
capital gains.
Administrative ease - Calculating what non-resident
income is taxable is simpler under adjusted gross
income, and would have been very complex under federal
tax liability.
Alaska Specific - Adjusted gross income now includes a
deduction for the permanent fund dividend, which is
not exempt on federal taxes.
Ms. Hansen elaborated that the bill was changed to base tax
rates on adjusted gross income rather than a percentage of
federal tax liability. She recounted that the previous version
of HB 115 added a tax on capital gains on top of the federal
tax rate due to the federal reduction on capital gains tax.
The results were more complicated and had a greater impact
than taxing capital gains with an adjusted gross income tax
system. She furthered that the federal exemption on the sale
of a primary residence was also exempted in the CS.
1:59:06 PM
Representative Wilson asked about the primary residence
exemption. She thought that the exemption only applied if the
value of the house was the same or higher and the tax payer
lived in the house at least two years. She wondered whether
the exemption applied to downsizing to a smaller home. Ms.
Hansen understood that the tax was connected to a gain over
the purchase price and the exemption applied if you lived in
the house over two years. She offered to confirm the answer.
2:00:32 PM
Ms. Hansen continued to slide 8: "Where does Alaska sit
currently?" The chart depicted that the state ranked in 50th
place for its state and local tax burden of 6.5 percent as a
percentage of state income in fiscal year 2012. She explained
that the data was from the Tax Foundation and was updated in
2017, however, the 2012 data was included because the ranking
remained the same and included more detailed data. She
recapped that Alaska ranked the lowest in state and local
taxation in the country.
2:02:05 PM
Representative Wilson asked about Alaska's property tax
exemptions and how they factored in the 6.5 percent burden.
She felt that the exemptions would "skew the numbers a lot."
Ms. Hansen offered to reexamine the data. She recollected that
the rankings were based per capita and per homeowners. The
data did not adjust for the senior exemption, but it did
adjust for the ratio of the number of people in the state that
were homeowners; the exemption did not affect the ranking.
Representative Wilson commented that the chart was from 2012.
Ms. Hansen replied in the affirmative and reiterated the
reason previously stated for including the 2012 versus the
2017 data. She furthered that the 2017 data did not include
the information regarding the taxes paid to the home state,
taxes paid to other states, and the income rank.
Representative Wilson wondered if the number reflected the
number of individuals that had left the state because of job
losses. Ms. Hansen believed the data was based on residency.
2:04:21 PM
Representative Pruitt asked for clarification regarding the
amount of taxes paid to other states. Ms. Hansen offered to
provide the information regarding how the organization
performed the modeling. She highlighted that the taxes paid to
other states included tourism taxes and production taxes on
oil and gas. She did not have a short answer because the model
was complex but would provide the information later.
Representative Pruitt cautioned that the tax was too complex.
2:06:14 PM
Ms. Hansen scrolled to slide 9: "State Personal Income Tax
Revenue as a Share of Personal Income in States with Broad-
Based Personal Income Taxes." She explained that the proposed
tax ranked Alaska the fourth lowest in the country. The
figures included the effective tax rate; the tax revenue on
personal income divided by the total personal income. The data
was provided by ITEP. She advanced to slide 10: "Sample of
Other State Income Brackets." She elaborated that the slide
incorporated income tax bracket data from four other states:
Hawaii, Ohio, Montana, and Kentucky. She noted the difficulty
in making a direct state by state comparisons due to each
states' unique modifications of its tax brackets. She reported
that 25 other states adjusted its brackets for inflation,
which was a provision in the CS. She indicated that the reason
the CS did include inflation adjustments was to avoid
including more tax payers in the top brackets.
2:08:04 PM
Representative Wilson asked for clarification. Ms. Hansen
responded that income rises with inflation; therefore, more
individuals would be included in the top brackets over time
without inflation adjustments. She pointed to the Department
of Labor and Workforce Development chart: "Workers and Wages,
Major and Selected Industry Categories." She remarked that the
chart excluded the self-employed, fishermen, and other
agricultural workers, and private household workers. She
highlighted that the 2015 report showed that the total number
of nonresident workers was 21.3 percent and the wages earned
by nonresidents reflected 16 percent of the states total
wages. The income tax included provisions to raise income
taxes from residents and nonresidents.
2:10:13 PM
Ms. Hansen moved to slide 12: "Corporate Income Tax avoided by
Sub S Corps and Limited Liability Corps in Alaska." She
relayed that the exemptions were "not the norm" in other
states. The chart illustrated the state's corporate tax rates
applied to C corporations. She furthered that the income tax
proposal included Sub S Corps and Limited Liability Corps.
Representative Pruitt thought that the tax impacted small "Mom
and Pop" operations by placing them in the "higher echelons of
the corporate tax structure." He wondered whether there had
been any studies done on the effects of the proposed taxes.
Ms. Hansen replied that the amounts on the chart were not the
brackets that applied to the sub s corporations and limited
liability corporations. The income from the entities would be
included in the individual's income tax. Representative Pruitt
provided an example and wondered whether he was accurate. He
was very concerned about the "substantial change" for small
businesses in Alaska. He emphasized that the CS represented a
"dramatic shift" for small businesses. The legislation was not
only taxing the individual but businesses as well. Ms. Hansen
clarified that the provisions proposed taxing certain
businesses through the income it provided to the individuals
as owners, partners, or shareholders. The businesses would
have the ability to write off their expenses and deduct their
share of corporate taxes paid. Representative Pruitt wondered
why the tax would not just be left to taxing the individual.
Ms. Hansen replied that the provisions corresponded more to
the nonresident corporations and attempting to "firmly
establish income from sources within the state." She would
work with Mr. Spanos [Brandon S. Spanos, Deputy Director, Tax
Division, Department of Revenue] for a more precise response.
Representative Pruitt believed that the provisions created
"multiple levels of complexity." He wondered why the tax was
not simply an income tax that was based on the distributions
to the individual instead of adding the corporate tax as well.
He deduced that it was a matter of "which side the tax would
be taken from." Ms. Hansen responded that the corporations
were already taxed in every other state. The corporations
retained a "certain amount of leniency for where they record
the income." She deferred the answer to Mr. Spanos.
2:17:05 PM
Representative Pruitt surmised that if an out-of-state
corporation could choose where it paid taxes, the action
"dampened" the effect of the state attempting to collect taxes
on income gained in Alaska. He questioned the reasoning behind
taxing s corporations. Ms. Hansen communicated that sections
AS 43.22.50, AS 43.0.55 and other sections that dealt with the
"pass through" entities and how they distributed its shares
was based on how the income was connected to a source within
the state and on the multi-state compact. Representative
Pruitt pointed out that Ms. Hansen had just stated the
entities had the option to choose. He reiterated his concerns
about adding another layer of tax. Ms. Hansen replied that the
entities could decide whether the corporation or the
individual paid the tax, however the tax remained connected to
the source within the state.
2:20:06 PM
Vice-Chair Gara believed that the last line of questioning was
very confusing to him. He ascertained that the tax rate for an
individual who gained income from their business was the same
as the tax rate for a wage earner. Ms. Hansen responded in the
affirmative. Vice-Chair Gara deduced that the tax rate in the
CS for an individual who made $20 thousand per year or $40
thousand per couple minus the $4 thousand exemption was 2.5
percent. He asked whether the statement was correct. Ms.
Hansen stated that he was correct. Vice-Chair Gara calculated
that a couple that owned a business making $40 thousand paid
approximately $300 in taxes. He did not view the amount as a
hardship. He stated that currently only C corporations were
taxed. He asked whether he was correct. Ms. Hansen replied in
the affirmative. He stated that a lawyer or doctor in Alaska
making $5 million per year did not pay any state taxes unless
part of a C corporation. He requested confirmation. Ms. Hansen
responded in the affirmative. Vice-Chair Gara defined that the
multi state tax compact prevented double taxing tax payers. He
asked whether the statement was correct. Ms. Hansen responded
in the affirmative. He wondered whether a corporation would be
taxed in Alaska if the state did not follow the multi state
compact. Ms. Hansen deferred her answer to Mr. Spanos. Vice-
Chair Gara inquired whether an individual was a laborer,
legislator, doctor, or individual business owner the tax rate
was the exact same based on their income under the CS. Ms.
Hansen answered in the affirmative. She added that the tax was
based on income regardless of the source.
2:23:40 PM
Representative Wilson asked where non-profits stood under the
CS. She wondered about native corporations that issued
dividends. Ms. Hansen answered that Mr. Spanos was preparing a
more detailed answer. She noted that the native corporations
were not non-profits and paid taxes. The dividends were paid
out to beneficiaries and were deducted from what the
corporation paid and were taxed at the individual level.
Representative Wilson wondered whether the beneficiary
dividend was included in taxable income. Ms. Hansen offered to
double check the federal tax status. She related that if the
dividends were included in the adjusted gross income the
amount was taxed at the individual level. Representative
Wilson wondered what other category the dividends could be
included under. Ms. Hansen replied that there was a category
for tax exempt dividends, but she needed to research what
dividends were included.
2:25:27 PM
Representative Pruitt remarked that an S corporation was
simply passing through money earned to the applicable
individual. He surmised that the income tax and tax on an S
corporation "cancelled each other out" since the money was
automatically passed through to a shareholder. The individual
receiving the money would have to pay a personal income tax
under the bill. He wondered about the tax being duplicative.
Co-Chair Seaton understood that Representative Pruitt referred
to the "normal functioning" of an S corporation. He qualified
that alternately, an S corporation could pay some of the
distributed taxes and the provision in the CS ensured that the
amount paid in taxes was not double taxed. He declared that no
provision in the bill double taxed anyone or entity, which was
why the provisions were very detailed. The details guaranteed
that loopholes were not left open to be interpreted to offer
loopholes or double tax anyone.
2:29:14 PM
Vice-Chair Gara observed that there was no double taxation in
the bill. He provided an example of an architect who made $1
million in wages that would be subject to the income tax
unless the income was earned as a shareholder in an S
corporation; then the architect paid nothing. He surmised that
a continued exemption created the scenario. Ms. Hansen
deferred the details of the amounts that could be passed
through at the corporate level to Mr. Spanos. She relayed that
if the shares were directly passed through to the shareholder
individual income taxes applied.
2:30:29 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT
OF REVENUE, commented on the discussion. He offered that S
corporations and partnerships were pass through entities and
were not taxed separately in the CS. A provision allowed a
partnership or an S corporation to pay on behalf of
nonresidents. A credit was available to the individual to
indicate that the S corporation paid the taxes. He summarized
that S corporations and partnerships were pass through
entities and taxes due were owed by the individual unless the
tax payer elected to pay via the corporation or entity.
Vice-Chair Gara wanted to confirm that an S corporation
shareholder paid the same tax as a wage earner making the same
amount and that no one was double taxed. Mr. Spanos answered
that ultimately the bill treated all income the same other
things being equal, "regardless of the structure of the entity
the individual belonged to."
2:32:44 PM
Ms. Hansen turned to the final slide numbered 13. The slide
depicted a current 1040 federal tax form. She pointed to line
37 that specified the amount of adjusted gross income and the
$4 thousand exemption was based on the federal exemption on
line 6 d of the 1040.
Representative Wilson wanted to know the reason for choosing
the federal exemptions. Ms. Hansen responded that most states
used an adjusted gross income. She relayed that it was
determined that the federal exemptions were "a good place to
start," were consistently used, and "leveled the playing
field." Representative Wilson contended that the deductions
were arbitrary and "at the end of the day," the exemptions did
not even the playing field. She had understood that the
discussion was income tax and was based off line 22, total
income. She thought that $4 thousand was the only deduction
allowed, but by using the federal exemptions 13 other items
were deductible. She asked whether what was being proposed was
based on what certain states had done. Ms. Hansen replied that
she could not speak to all the decisions that were made
regarding the CS. Representative Wilson was not trying to
place Ms. Hansen on the spot. She asked Co-Chair Seaton who
made the decision to include the exemptions.
Co-Chair Seaton relayed that the decision was made based on
testimony that listed problems with using tax liability. He
shared that the administration had hired a tax consultant to
develop an income tax. The tax was based on adjusted gross
income that was used in many other states. He suggested she
offer an amendment to tax all income without deductions. He
remarked that a starting point had to be chosen and the
federal adjusted gross income was a "logical" choice because
it included sensible exemptions.
2:40:09 PM
Representative Wilson stressed that her questions were not
indicators of whether she agreed or disagreed with the bill
but were an attempt to understand the bill. She thought there
were many things in the bill that were complicated and wanted
to better understand all the parts and pieces. She hoped to
receive answers to all the questions asked by committee
members.
Representative Pruitt inquired whether landlords could deduct
expenses from their rental income before paying taxes. Ms.
Hansen did not know enough about the specific issue. Co-Chair
Seaton responded that line 12 reported business expenses from
the federal Schedule C form and would be subtracted from total
income.
Representative Wilson corrected Co-Chair Seaton that the
accurate form was Schedule D, line 17. She continued to
explain that Schedule C was for small businesses.
Ms. Hansen relayed that Mr. Spanos would present the following
day.
2:44:48 PM
Co-Chair Foster introduced Mr. Davis and noted that a document
dated March 24, 2017 titled "Assessing the Distributional
Consequences of Alaska's House Bill 115 (Version L)" (copy on
file) was distributed to members.
CARL DAVIS, RESEARCH DIRECTOR, INSTITUTE ON TAXATION AND
ECONOMIC POLICY (ITEP), ANCHORAGE (via teleconference), spoke
to the memo. He relayed that the information primarily
contained a "distributional analysis" on how the bill impacted
Alaskan families at different income levels. He commented that
the two core findings were that the income tax was
progressive, and the amount of tax paid increased with income.
He continued that the cuts to the PFD were regressive and
impacted lower income families more than middle or higher
income families. He pointed to figures 2 and 3 of the analysis
[pages 4 to 5] that compared the changes and the impact on
federal taxes. He reported that the net impact of the
progressive income tax and regressive PFD cut was
"proportional overall." Figure 3 portrayed that family's
income from all levels would be reduced by 1.8 percent to 2.8
percent. The plan relied more heavily on larger PFD cuts in
the initial years therefore, the plan was more regressive
overall and impacted families at the bottom income levels by
8.6 percent relative to their income.
2:48:09 PM
Representative Wilson pointed to page 1 of an ITEP document
and read bullet point two and three:
Most states with personal income taxes offset some of
the impact of regressive fiscal policies on their low-
income taxpayers by offering a refundable Earned
Income Tax Credit (EITC) patterned after the federal
EITC. In Alaska, a state credit calculated at 25
percent of the federal EITC could reduce the impact of
the bill on the state's low-income taxpayers by 1
percent of their income. Such a credit would reduce
Alaska income tax revenues by roughly $25 million per
year.
Low-income families, for whom the PFD represents a
major source of income, would be impacted more heavily
in the years immediately following implementation of
this bill. This is because reductions in the PFD
payout are forecast to be largest in the short-term.
If the PFD payout is reduced by $950 per person, the
bottom 20 percent of earners could expect to see an
impact from this bill equal to 8.6 percent of their
incomes. This far exceeds the 2.9 to 4.1 percent
impact felt by other groups under this scenario. (See
Figure 2 and Table A.)
Representative Wilson asked for further clarification. Mr.
Davis replied that the analysis was not based on provisions in
the CS. He offered the information after examining the results
from the data used in figure 2: "Impact of Alaska House Bill
115 (Version L)." He discovered that the impacts in the early
years of implementing HB 115 was steady across income groups
except for a PFD reduction of $950 which had an "outsized"
impact on low income groups; an income reduction of roughly
one percent for the lowest 20 percent. He furthered that the
bill did not offer an earned income tax credit, unlike most
states with a personal income tax. He elucidated that the
intent of an earned income tax credit was to offset the impact
of changes in fiscal policy on low income groups.
Representative Wilson referred to the chart on pages 4 or 5 of
the document. She asked where the category data was derived
from and whether it reflected the loss of jobs due to the
economy. Mr. Davis answered that he utilized the most recent
reporting by the Internal Revenue Service (IRS), which was
from 2014, and the data was "aged forward" to 2016 using other
sources of economic analysis including the Congressional
Budget Office. He shared that ITEP attempted to gather state
specific forecasting data to include analysis for future years
but was unable due to the imprecise nature of the data. He
furthered that the number of people in each income group was
based on IRS returns. He reported that each income quintile
represented roughly 70 thousand units or tax returns. The
number of individuals in each quintile differed due to family
size; families at the top tended to be larger than families in
the bottom quintiles. Representative Wilson asked if the
lowest number of returns reflected children. Mr. Davis
reiterated that the families in the lower quintiles "tended to
have fewer children on average." He delineated that the number
of people was not the same in each income group, but the
number of tax units remained constant at 70 thousand tax
returns per quintile.
2:54:25 PM
Representative Wilson mentioned that she was not requesting
forecasted data. She wondered how he would have shown the
adjustment for lost jobs due to the economic downturn. She
also questioned how he determined the 78 percent to 22 percent
split between residents and nonresidents. Mr. Davis responded
that the information was not as detailed as he would have
liked. He had obtained information on how the Alaskan economy
had changed but did not have sector specific information. He
elaborated that if a dramatic shift had occurred over the last
year or two within one sector, the affects could not be
reflected in the current data. The company relied on the ISER
figure of income tax revenue to determine the nonresident's
percentage and had to rely on outside sources since ITEP did
not have data on nonresident income tax contributions. The
income quintiles only included Alaskan residents and the
nonresident data was included as an addition to the
residential data. He added that ITEP was able to model the
federal income tax in Alaska and an alternative scenario
included in HB 115 where Alaskans can write-off the $660
million of state income tax, which triggered a federal income
tax cut of approximately $102 million. Therefore, the combined
impact of federal tax cuts and income tax payments by
nonresidents would raise an estimated 22 percent of the
revenue in HB 115 and reflected reliable data. Representative
Wilson was very concerned with not having the correct data.
She asked whether only those tax payers with itemized
reductions could write the state's income off their federal
taxes. Mr. Davis confirmed that Representative Wilson was
correct and had "an important point" but his analysis did
account for that scenario. Representative Wilson opined that
her point made her question the analysis regarding the write-
off impact on federal taxes. She reiterated her doubt about
the accuracy of the data and projected revenue.
2:58:31 PM
Vice-Chair Gara asked him to explain the $4 thousand exemption
per person. He referenced the provision that exempted a single
filer from the income tax who earned under $10.3 thousand
dollars. He asked whether someone who earned less than $14.3
thousand would also be exempted due to the $4 thousand
exemption. Mr. Davis responded that he was correct. Vice-Chair
Gara wondered whether the amount was doubled for joint filers.
Mr. Davis responded in the affirmative. He furthered that the
additional exemption for the PFD dividend was equally
"significant." Vice-Chair Gara wanted to clear up confusion.
He relayed that the bill did not impose a tax for a single
filer who earned $14.3 thousand or less and under $28.6
thousand for joint filers (after the PFD exemption). He asked
whether the two percent tax only applied to income above the
figures he quoted and if the tax due totaled $25. Mr. Davis
answered in the affirmative and confirmed Vice-Chair Gara's
statements.
Representative Guttenberg asked how he performed the modeling
and whether most of the figures were "aggregate." Mr. Davis
affirmed that the distribution charts were based on averages
and represented aggregate tax payer groups. He mentioned that
every tax payer would be impacted differently depending on
their specific situation. Representative Guttenberg wondered
when more accurate figures would be available to upgrade the
model to 2017. Mr. Davis answered that the annual update from
the IRS was the "fundamental" basis for the model due to its
detailed data on income levels and sources. He reported that
updated figures would be released later in the year for 2015.
He incorporated any other new usable economic data or
projections when released. Representative Guttenberg referred
to the population and job loss projections from DOL. He
wondered how appropriate it was for ITEP to incorporate the
data into their model. Mr. Davis relayed that ITEP examined
the DOL data and adjusted the model downward. He noted the
dramatic differences in each states' economy and tried to
incorporate state data when it contained enough details.
Representative Guttenberg inquired whether the quintile data
was adjusted downward and included the loss of children in the
economy in terms of their effect on school district counts or
PFD loss of family income. Mr. Davis confirmed that he
adjusted the PFD data for 2016. The information on the number
of recipients was rooted in 2016 data. He detailed that the
income tax data was less concerned with employment but focused
on income levels. The employment data was less of a priority
than the correct income levels which to some extent reflected
the employment levels.
3:05:25 PM
Representative Grenn recalled a prior year ITEP report that
indicated 70 or 80 percent of Alaskans would pay less via a
sales tax than last year's proposed income tax. He wondered
whether the same applied to the current income tax proposal.
Mr. Davis answered that the number that ITEP used in the
previous year came from an ISER report finding that
approximately 80 percent of Alaskan taxpayers would pay less
under an income tax linked to federal liability than under a
general sales tax designed to raise the same amount. [Mr.
Davis' teleconference call was dropped.]
3:06:50 PM
AT EASE
3:07:42 PM
RECONVENED
Co-Chair Foster indicated Mr. Teal would be presenting to the
committee.
3:08:24 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, referred
to documents in the member packets titled: "HB 115 Amended OMB
Budget" and "HB 115 Amended Flat Budget" (copy on file). He
indicated that the models reflected HB 115 updated numbers and
the bill's impact on the operating budget and PFD. He began
with the data on the "HB 115 Amended OMB Budget" slide that
contained four graphs depicting the model results based on the
Office of Management and Budget's (OMB) Ten Year Plan. He
relayed that the data portrayed a balanced budget beginning in
FY 20 and draws off the Constitutional Budget Reserve (CBR)
ceased. He noted that in FY 19, the income tax revenue "kicked
in" halfway through the year and was flat at roughly $700
million in the out years. He pointed out that the CBR balance
was rising from interest and settlements because the balanced
budget ended the need for CBR draws. The Earnings Reserve
Account (ERA) was steady at roughly $9 billion due to the
increasing payout of $50 million to the general fund (GF) with
the remainder appropriated to PFD's. He highlighted that in FY
2018 dividends were $1250 and would remain steady rising
slightly to $1400 by FY 2026.
3:12:19 PM
Representative Wilson ascertained that trusts, S Corporations,
and LLC's were currently taxed in the CS and was a new
provision. She assumed that the additional revenue was
included in the model and wondered how it impacted the model.
Mr. Teal deferred the answer to DOR. He commented that he only
received the $700 million in revenue estimated number from the
department. Representative Wilson asked whether the figures
were the same as the previous version's estimates. Mr. Teal
answered that the income tax revenue estimates were roughly
$30 million annually higher in the new CS. Representative
Wilson asked, "what part of the bill" the $30 million in
increased revenue impacted. Mr. Teal remarked that the CS
contained a major change in the income tax provisions and
presently, the tax was based on adjusted gross income. He was
unable to answer the question without detailed information. He
received a single number from DOR. Representative Wilson asked
whether a fair conclusion was that the revenue in the CS
increased by $30 million but the source of the increase was
unknown. Mr. Teal responded that Representative Wilson was
correct.
Vice-Chair Gara remarked that the CS did not add income from S
corporations and LLC's. The previous version of the bill and
the state's prior income tax taxed the individual owners of
the entities. He asked whether the statement was correct. Mr.
Teal responded that he was correct. He added that the entities
were "pass throughs" and the distributions to individuals was
taxed. Any version of an income tax based on the individual
income that included the entities would tax the income.
3:15:41 PM
Representative Wilson interjected that the CS title was
changed to include the entities in the new version of the bill
and she presumed that a change occurred from the original
version of HB 115.
3:16:16 PM
Co-Chair Seaton affirmed that the entities were taxed under
the previous version of the bill. He explained that when the
bill changed to adjusted gross income more detailed provisions
were included to avoid loopholes. The CS was a more detailed
construction of the bill. The intent was to include "some
balanced progressive tax rates." He reported that the goal was
to raise approximately $650 million to $700 million in revenue
from an income tax as part of a balanced sustainable fiscal
plan that worked under OMB's 10-year projection. He furthered
that the previous version of the income tax based on a
percentage of federal tax liability and the new CS were
"relatively" the same in terms of revenue generation and
progressivity. The difference between the versions was that
the volatility from basing the tax on federal liability was
eliminated. The change occurred based on advice from previous
testimony. Representative Wilson did not understand how the
bill impacted trusts for individuals who live in the state
versus those who did not and how it affected the economy. Co-
Chair Seaton replied that nonresident trusts that do not
derive income from within the state were not taxed under the
bill. He surmised that her desired outcome regarding trusts
were integrated into the bill. He elucidated that individuals
would only be affected if the trust's income came from a
source within the state. A trust manager would likely use
diversified investments. However, if there was a trust with
large investments in the state generating revenue the income
would be taxed under the bill.
Representative Wilson appreciated his reply. She deduced that
the bill would not impact nonresidents but thought the
provision would impact residents who therefore, might set up
their trusts in other states instead.
3:21:03 PM
Representative Ortiz attempted to summarize the impact of HB
115 with an income tax versus without an income tax. He did
not believe any one was excited about paying an income tax. He
was aware of the potential impact the income tax had on people
in the state. He wondered whether an income tax helped solve
the fiscal problem in the state, created a stable fiscal
climate, supported the state's bond rating, created a more
certain business environment, and if the state's savings would
grow. He asked if there was a "net positive" with the
legislation. Mr. Teal explained that bond ratings were tough
to deal with and the "raters had their own black box."
However, it was likely safe to say that "with a balanced
budget the bond rating would be higher." He reiterated that
the model demonstrated that with HB 115 the budget was
balanced, and reserves grew. He voiced that without an income
tax, deficits of roughly $600 million to $700 million would
continue and reserves declined, which offered a plan without a
solution and created uncertainty because at some point the
deficit had to be addressed. A plan that balanced the budget
provided more certainty than a plan that contained a deficit
and did not offer assurance on how the deficit would be
filled; either by budget cuts or revenue generation.
3:25:08 PM
Vice-Chair Gara asked Mr. Teal to display a model based on SB
26 (APPROP LIMIT & PER FUND: DIVIDEND; EARNINGS). He wondered
how much revenue would be generated beginning in FY 18 and FY
19 for public services. Mr. Teal responded that SB 26 did not
include revenue generation and lacked approximately $700
million per year. He noted that the bill offered a different
PFD amount that remained flat at $1000. He noted that a
provision in SB 26 payed out 25 percent of the Percent of
Market Value (POMV) appropriated to dividends versus 33
percent in HB 115 and was the difference in the deficit of
$500 million because the additional $200 million paid
dividends. The bills were very similar except for the income
tax. Vice-Chair Gara guessed that the FY 18 deficit was
roughly $2.8 billion. Mr. Teal answered in the affirmative.
Vice-Chair Gara deduced that SB 26 had an estimated $560
million deficit in FY 19. He reported that some had referred
to SB 26 as a "95 percent solution" and wondered why.
3:28:19 PM
Representative Pruitt interjected that the Senate had a
different philosophy about the actual "spend" for government
and wanted higher budget cuts, which should be part of the
discussion about SB 26 and the 95 percent.
Co-Chair Foster indicated that there would be a more detailed
discussion when the committee would hear SB 26 the following
morning.
Representative Wilson thought that the discussion should
include the top graph on the left of the slide that depicted
the budget cuts of $300 million in the current year and $250
million for the following two years and compare the entire
plan contained in SB 26.
HB 115 was HEARD and HELD in committee for further
consideration.
3:29:48 PM
Co-Chair Foster reviewed the agenda for the following morning.
ADJOURNMENT
3:30:42 PM
The meeting was adjourned at 3:30 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 115 ITEPanalysis_HB115vL.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115 _CS Sponsor Statement.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115 CS flow chart 3.23.17.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB115 CS 2017 AGI Chart filing status.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB115 Presentation in HFIN_CS V. L_3.27.2017.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115 Amended, OMB Budget.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115 Amended, Flat Budget.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115 background _Adjusted Gross Income_main points of how the tax works_3.26.2017.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115 ITEPanalysis_PFDcuts.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |
| HB 115_Sectional draft version L_long form_3.26.2017.pdf |
HFIN 3/27/2017 1:30:00 PM |
HB 115 |